On Monday, February 3, Jim Madden, CEO, rang the opening bell on the NASDAQ stock exchange in New York City. The stock exchange invited Exult, the Irvine, California pure-play BPO HR service provider to celebrate its good news: the outsourcing start up produced its first ever quarterly profit the fourth quarter of 2002.

Exult announced earnings of $1.8 million for the quarter with cash and short-term investments of $128 million at year-end. 2002 annual revenues totaled $420 million, up 54 percent from the prior year.

“This is an important announcement for the HR BPO marketplace because it proves profitability is possible,” says Michel Janssen, President, Supplier Solutions for Everest Group. He says Exult has been “under the microscope” because it represents the largest, pure-play public BPO company in the market today.

After the dotcom bust, the marketplace wondered if this kind of company could survive. The marketplace watched as other BPO start-ups like LeapSource went under. “Clients are nervous about signing a contract with a company that has never been profitable,” Janssen observes. That worry caused wary potential buyers to do additional due diligence before signing a contract with newcomer Exult. “While this announcement won’t completely alleviate these concerns, it does help validate that Exult has a viable business model,” Janssen says.

An Idea Funded by Venture Capitalists

“Four years ago, the company didn’t exist,” says a jubilant Kevin Campbell, Exult’s chief operating officer. “The idea for this kind of outsourcing didn’t exist,” he adds. He is proud that the company was able to bank $420 million in revenue “in the worst economy America has seen in 10 years.”

Exult was the result of a meeting of the minds between Madden and General Atlantic Partners, a venture capital firm in Greenwich, Connecticut. Madden, who had been doing IT outsourcing for years, wanted to venture into BPO. General Atlantic wanted to fund a BPO service provider and was searching for a leader. “Both parties met, and it was love at first sight,” quips Campbell.

In 1998 General Atlantic provided $50 million to launch Exult. Subsequent rounds of funding totaled over $200 million. Exult went public during the dotcom mania in May 2000.

Campbell joined the company that May, after a short stint at Ernst & Young and 19 years at Accenture, mostly in outsourcing. When he first joined Exult, friends and family applauded his entrepreneurial spirit and his good fortune. A year later, after the dotcom death march, people told him “he was an idiot.”

The COO says the management team lived through the dark times by “refusing to give up.” He says, “We believed in what we were doing. We were passionate about HR BPO.” Campbell says the fact that Exult is an outsourcing service provider guaranteed its survival. “We weren’t selling advertising on the Internet. We are experts at a process that is mission critical to our clients,” he explains.

Finding Buyers: “Fishing for Whales, Not Minnows”

Early business decisions turned out to be wise. First, the company decided “to fish for whales, not minnows.” Exult went after a few big clients instead of numerous small ones. Its client roster includes Bank of America, BP, International Paper and Prudential.

Campbell says BP, Exult’s first client, is known as an innovative company that was willing to accept risk. BP was looking for a scrappy firm to take over both HR transaction work as well as HR processes. “They liked our approach and our management team, but there was a question of credibility since we were a start-up. They trusted General Atlantic would keep us solvent,” he recalls.

Another sage choice was to select a niche and then stick to it. When times got tough, Exult didn’t expand to other BPO processes to stay solvent. Instead, it selected a management team with HR process expertise as well as HR outsourcing experts from what was then the Big Five.

Management was quick to do unpopular things to protect the company’s survival. For example, Exult was quick to consolidate some of its service centers to make its numbers work. “We wanted to become profitable in a reasonable period of time, so we had to stay true to our plan,” the COO says.

Underestimating the Difficulties

Campbell says Exult’s management team underestimated the difficulties in two areas. First, the company didn’t realize how difficult it was to operate in a multi-client environment. “Getting the processes to work for the first client was easy. Getting it to work with multiple clients is extremely hard,” says Campbell.

Second, the COO says the management team underestimated the work involved in being a public company. Fortunately, Madden had run other public companies, so he had some experience.

Campbell says the “loneliest part of being a pioneer” was plotting the company’s course. “We couldn’t copy someone else because no one had done this before,” he explains.

Exult’s Future

Today’s bear market combined with Exult’s delayed profitability made Wall Street nervous, according to Janssen, causing Exult’s stock “to be punished.” It has traded as low as $2. I asked Campbell if he thought Exult’s low stock price would make it an attractive takeover target for a larger HR service provider. He says General Atlantic and Exult management own over 55 percent of the company “and we’re committed to continuing to staying the course we are on.”

Janssen says the pressure is now on Exult to sign new business. While Exult signed several important contract extensions with some of its current seven customers, it added only one new logo to its signed contract base – Prudential in February 2002, he points out. In addition, the Everest executive believes Exult’s new profitability will attract new entrants to the marketplace, putting pressure on Exult to compete against competitors that may willing to cut prices to enter the market. “It’s likely Exult will be challenged to balance market share concerns with those of short-term profitability,” he predicts.

“That’s a challenge we welcome,” says the COO. He adds that all new entrants will “have to be operationally successful. It sounds like this is easy,” but his experience proves otherwise. Campbell estimates it will take newcomers at least three years to catch up operationally.

The challenges of the future for Exult may be as daunting as the ones of the past. But Campbell wouldn’t change the experience for a minute. “I don’t recommend starting a BPO company for the timid of heart,” says Campbell. “But for me, it was the best business experience of my life.”